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Unprecedented Austerity

December 12, 2013 8:36 amDecember 12, 2013 8:36 am

As many people have noted, a strange thing has happened on the fiscal policy front. Intellectually, the case for austerity has pretty much collapsed, having been reduced at this point to the Three Stooges Theory:
we’re supposed to consider austerity a success because it feels good when you stop, or at least let up. At the same time, however, austerity policies continue to be imposed,
on both sides of the Atlantic.

And amid the punditizing over the latest budget deal, it’s worth considering just how unprecedented US austerity has been. Look at total government spending — federal, state, and local — and correct
it for inflation, as measured by the core personal consumption expenditures deflator (the Fed’s preferred measure). (It doesn’t matter much which measure you use, but this one has less noise). Smooth
it out by looking at three-year changes. Here’s what you get:

Photo

Credit

You can see that there was a brief, modest spurt in spending associated with the Obama stimulus — but it has long since been outweighed and swamped by a collapse in spending without precedent in the past half
century. Taking it further back is tricky given data non-comparability, but as far as I can tell the recent austerity binge was bigger than the demobilization after the Korean War; you really have to go back to
post-World-War-II demobilization to get anything similar.

And to do this when the private sector is still deleveraging and interest rates are at the zero lower bound is just awesomely destructive.